UK’s small business confidence returns after referendum knock

The confidence levels of the UK’s small businesses returned to pre-referendum levels in the last quarter of 2016, according to the Federation of Small Businesses’ (FSB) Small Business Index.

The headline confidence measure rose from -2.9 in Q3 to +8.5 in Q4 – almost the same level as at the start of 2016 (+8.6) – meaning more small businesses feel confident than those that don’t.

However, the report claims that most small businesses have not seen confidence translate to profits, which dropped for the second quarter in a row, while investment intentions have fallen and costs continue to rise.

28% of businesses now cite the exchange rate as the main cause of cost inflation, compared to 5.4% last year as the pound remains low against other major currencies.

The proportion of businesses intending to grow over the next 12 months has dropped, with 37.5% expecting to stay the same size, compared to 27.4% in Q2 2015. Despite this, job creation is up for the second quarter in a row, with 10% expecting to recruit this quarter.

At the same time, The Bank of England has reported that the number of businesses operating below capacity has dropped to 44.2%, which it says supports the case for leaving interest rates on hold to help small businesses expand and bolster their workforces.

Mike Cherry, national chairman at the FSB, commented: “We are delighted to see confidence bounce back at the end of 2016, effectively wiping out the fall we saw over the course of the year in the run-up to the EU referendum and its immediate fallout.

“Our members tell us they are maximising their opportunities in this current positive economic climate. But with costs rising, they will need support for their confidence to translate into new economic growth and jobs.

“As policy makers prepare for Brexit negotiations and look to small firms to contribute to the UK’s economic success, we would urge them to be ready to act if trading conditions deteriorate.”